Pension schemes and their administrators are far from infallible, and schemes frequently overpay pensioners, who may or may not be aware of this. Here is what trustees can do in such cases. 

 

Since 2010, 90 Pensions Ombudsman cases have centred on the recovery of overpaid benefits. Most were not upheld, but 22 were partly upheld and 17 fully upheld. 

 

Complaints often arise because a mistake by the employer or scheme led to an overpayment which the scheme then seeks to recover 

 

“It happens more often than any trustee or administrator would like,” says Mark Jenkins, a senior associate in law firm CMS. “Human error sometimes creeps in, and errors with things like benefit statements or transfer quotes are made and not spotted until payments are made,” he adds, or even much later than that, when an audit is being carried out for example. 

 

 

So can trustees just ask for the money back when they become aware of an overpayment? 

 

“Trustees only have the power to pay benefits members are entitled to under scheme rules,” explains Jenkins, which means in principle they are obliged to seek to recover the overpayment. The only exception to this is where the effort would exceed the value of the overpayment, with the threshold currently set at £250. 

 

But in reality, there are also other circumstances that mean the trustees either can’t or prefer not to recover the overpayment – for example where the member or their estate refuse to engage with the trustees. Short of court action, there is little the trustees can do. 

 

Usually, however, “there is a begrudging acceptance of a need to return funds” among affected members, he says. They are allowed to make the repayment over the same amount of time as the time over which it took place, either as a lump sum or in instalments, sometimes deducted from the monthly pension payment going forward. 

 

"It's coming to a reasonable solution with the member,” said Jenkins. 

 

There is however a defence available to members, termed ‘change of position’. 

 

For a change of position defence to succeed, the member must have acted ‘in good faith’, must not have been aware of the error and must show that it was reasonable for him or her to have relied on the error. Where a payment is significantly higher than what a member could expect to receive, the defence is not available; the Pensions Ombudsman would expect them to have made enquiries about the increased payment. 

 

Even if all of the criteria for a change of position apply, where the money was spent on an asset, the ombudsman could still ask the member to sell the asset and make the repayment. 

 

 

If a member has a change of position defence, the trustee will seek to recover the money elsewhere, and tend to instead look to those who made the error – often the administrators.  

 

“It does happen quite regularly, where recovery isn’t possible, to show the administrator was at fault. It’s an avenue we would generally advise trustees to consider," Jenkins says. 

 

Gerald Wellesley, a client director at Punter Southall Governance Services, says he recently had just such a case. “The administrator picked up the overpayment via fee rebates so that no reclaim was required,” he explains. 

 

“Overall, it’s often complicated by considerations of the damage done to members if they have spent the money and can’t tolerate an unexpected repayment," he notes. 

 

 

In some schemes, overpayments affect not just one member but have been systematic, observes Lesley Browning, a partner in law firm Norton Rose Fulbright. Such overpayments among whole sections of the membership happens more often in larger scheme with different benefit structures. 

 

“You might find that different members have different pension increases, and there could be a situation where the wrong pension increases have been awarded and unpicking that becomes a lot more complicated,” says Browning. 

 

In a scenario like this, the trustees will usually find that some of the overpayments cannot be recovered, either because the member has died or because they have transferred out.  

 

“You have to think of all categories of members who have been overpaid” to establish how much has been overpaid, she says, even if not everything can be recovered. Where a member has died, the estate is generally not asked to repay the overpayment. “No trustee would want to go after a member’s estate,” says Browning. 

 

Where there has been a systematic overpayment, the employer might also take an interest. 

 

“In some situations, the trustee and employer don’t agree on how it should be remedied,” she notes. “Where it is a group, the amounts might be quite high, and the group might want to go further than the trustee,” but many scheme rules specify that the power to settle such disputes is vested with the trustee. 

 

Lesley Browning

Gerald Wellesley

Mark Jenkins